Academia takes a commercial route

Commercialising academic breakthroughs in science and technology is well-established, but financial innovation has largely been the preserve of industry practitioners.

Now Frankfurt School of Finance and Management in Germany is planning to break the mould by launching a novel financial company spun out of academia.

“This is evidence that spin-offs are not only viable in the biotech or information technology sector,” says Udo Steffens, president of the Frankfurt School.

“They are also an innovative approach for business schools to achieve better capitalisation of knowhow and knowledge and leverage further growth.”

The business being formed into a standalone company is already an advisory arm and fund management operation with more than €500m ($780m, £400m) under management.

But it is not another me-too competing with commercial firms for retail investor cash and to employ equity or derivatives markets. Rather, it is a niche player in the esoteric but growing world of microfinance to speed economic development in eastern Europe. Its roots lie in the opening of eastern European countries,

“The telephone was always ringing with callers asking for training in this field,” says Prof Steffens. As knowledge of the university’s expertise spread, it soon found demand for advice too and developed a specialised consultancy service.

Two years ago that developed further with the launch of a Luxembourg fund, the European Fund for Southeast Europe, designed in close co-operation between academics at the Frankfurt School of Finance and Management and a German state development bank, KfW.

The aim was to channel money to financial institutions in south-east Europe, including commercial banks, microfinance institutions and investment companies. It supplies them with loans, guarantees, standby letters of credit, bonds and other debt instruments. The ultimate beneficiaries include more than 70,000 end-borrowers.

The fund achieved a capitalisation of €500m by the end of last year, three years ahead of schedule. It was designed by the experts in Frankfurt to compartmentalise risk and the three tranches have different risk profiles.

The first-loss tranche comprises grants from donors, often European government development agencies. The mezzanine tranche comes largely from international financial institutions, such as the European Bank for Reconstruction and Development. The senior tranche, amounting to more than 30 per cent of funds committed, attracts money from private sector investors, including Deutsche Bank and Sal. Oppenheim.

The structure leverages aid donations to raise a lot more money to augment the total funds available to invest in the region.

Research

The people who manage the money have until now been employed by the university. Sylvia Wisniwski, who heads the activity and who will run the company, has a team of 20 people in Frankfurt and another 25 based in the Balkans who seek investment opportunities.

Although academics are closely involved, many of the staff are graduates of the school who have moved into salaried jobs in this special fund management business.

In spite of approaches from would-be partners, the business school, a not-for profit organisation, is turning its fund management arm into a 100 per cent-owned limited company.

Over the past decade, “the motivation for us as an academic institution was to grow revenue, which has been reinvested in research and teaching”, says Prof Steffens.

Now the management school wants to unleash the potential it sees in the business it has created. Thus far, the business has one mandate. But its expertise might well attract others and apply to funding climate change investments, Prof Steffens believes. “We are very optimistic that this will be a business that will grow very fast,” he says.

The spin-off by Frankfurt School of Finance and Management, a €50m-a-year operation, could inspire others to review their strategy. Both Tanaka Business School at Imperial College in London and Harvard Business School in the US have consultancy arms.

The Frankfurt school sees the spin-off, which will take effect in August, as simply the logical next step in a drive to consolidate and enlarge its expertise in development finance.

Financial centre

Prof Steffens is also busy recruiting a professor for the school’s new chair in development finance. That will be followed by the launch of a Master of Development Finance course. The two-year programme, leading to an MSc, will deal with economics, finance and management, with a focus on development issues.

Students will spend three to four months working on a development finance project in a developing country. Their placements will be arranged in collaboration with the school’s International Advisory Unit. Some may work in the spin-off or with its partner organisations, while many will find themselves far from the beaten tourist tracks. The fund managed by the company-to-be has operations in Bosnia and Herzegovina, Romania, Serbia, Kosovo, Moldova, the Former Yugoslav Republic of Macedonia, Albania and Bulgaria. It is poised to start operations in Ukraine.

Prof Steffens and his school seem determined to remain leaders in microfinance and development finance. The school has also established a development finance research centre.

From Frankfurt, this makes perfect sense. The city is the biggest regional financial centre and, since the break-up of the former Soviet Union, many German and Austrian financial institutions and commercial companies have expanded into eastern Europe and the Balkans. The school’s aim is to help plug the funding gap between commercial capital and governments. But, in the process, it is acquiring and sharing expertise with applications in other developing regions.